Chad threatens to cut ties with Sudan, AU

* Chad says AU lacks capability to solve Chad-Sudan crisis

* Says to seize Sudan-funded schools, shut cultural centres

N'DJAMEMA, May 10 (Reuters) - Chad may cut ties with its neighbour Sudan and the African Union after the organisation failed to solve the long-running dispute between the two oil-producing countries, President Idriss Deby said on Saturday.

Chad halted an attempted rebel advance on the capital last week after fighting in the east, which it accused Sudan of stoking by sending armed groups over the border.

The African Union said on Friday that states would respect the principles of "non-interference and good neighbourliness" while the U.N. Security Council has condemned what it described as military incursions "coming from outside" Chad.

"The Chadian government should evaluate, together with friendly countries, our relations with the African Union seeing its inability to find suitable solutions to crisis between Chad and Sudan," Deby told politicians at the presidential palace.

"Chad should consider withdrawing its confidence in the African Union and pass the resolution of the crisis to the United Nations alone," he said.

The fighting, in which Chad said 225 rebels and 22 government soliders were killed, threatens a peace deal Chad and Sudan signed in Doha last week in which they agreed to normalise relations and reject support for rebels hostile to either of them.

Chad says Sudan supports armed groups who want to topple the N'Djamena government, while Sudan has long accused Chad of backing rebels in Darfur who have fought Khartoum since 2003.

The two countries resumed fragile diplomatic relations last November after cutting them in May.

"The government should reevalute relations between Sudan and Chad and envisages...if the situation has not evolved positively, the breaking of these relations," Deby said.

"To this end, Sudanese cultural centres should be closed and schools financed by Sudan take over by the Chadian government." (Editing by Daniel Magnowski and Angus MacSwan)